ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Using ETF’s as a hedge

Updated on July 24, 2016

Small investment hedges portfolio

Being a market timer, there are times in the stock market where I feel the market has topped and I would like to sell some of my mutual funds and buy them back at a later date when the market has dropped. There are problems with doing this. I like the funds I have! When investing outside of an IRA there are tax implications. Many times mutual funds require you to hold them for a number of months before selling them or you will have to pay a penalty. The question I ask is how may I get around this problem? The answer is in leveraged exchange traded funds.

To understand how this works one must understand that your portfolio is a single pool of money not some fragments invested here and there. You must also understand that your mutual fund prices will vary up and down at a rate similar to the market.

Increase your investments growth rate

Leveraged 2X short ETF’s

Leveraged short leveraged exchange traded funds increase in value at a rate double the percentage drop in the index the exchange traded fund is following. For example the NASDAQ 100 index leveraged exchange traded fund is symbol QID. A one percent drop in the NASDAQ will cause a two percent rise in the QID leveraged exchange traded fund. Like wise a five percent drop in the NASDAQ 100 will cause a ten percent rise in the fund.

So how do I make this work in my portfolio? Let’s assume I believe the stock market is going to pull back or drop. Let us assume that I have $80,000 in mutual funds and $20,000 in cash. At this point I go out and buy $20,000 in leveraged exchange traded fund QID. Next let us assume I was right and the market dropped 10 percent. My mutual funds would be worth only $72,000. My investment in QID would be worth $24,000 meaning I my portfolio would drop in total value to $96,000. If I had not purchased QID my portfolio would have dropped to $92,000.

Let’s assume I was wrong and the market goes up another 10 percent. My mutual funds rise in value to $88,000. My investment in QID drops 20 percent in value to $16,000. My portfolio has risen to $104,000. If I had not purchased QID my portfolio would have raised to $108,000.

What has happened is I have limited my losses (and also my gains). I have created the same effect as selling some of my mutual funds without having to sell them. To get the effect of a 10 percent drop in the example above I would have had to sell $40,000 worth of mutual funds or half of my holdings. This creates one taxable event. Even in the case of an IRA it means less trading which can cause a host of issues.

There are a host of leveraged exchange traded funds available to investors. They include:

QID- NASDAQ 100 2 times short

DXD- Dow 2 times short

SDS- S&P 500 2 times short

MZZ- S&P 400 2 times short

SDD- S&P 600 2 times short

TWM- Russell 2000 2 times short

There are other leveraged exchange traded funds available some of them go up 2 times the market or even 3 times the market but are not covered here.

Using this method you must accept that you may be right or you may be wrong. This is not something for novice investors to be doing with their nest egg.

Be sure to keep your portfolio well diversified and keep within your own asset allocation. Invest in the best funds in those asset classes. Once the investor has their asset allocation select the best small cap, large cap, global, bond, and even concentrated portfolio funds for their portfolio.

Fund picks for 2010 may provide you with some interesting reading.

Leveraged 3X short ETF’s

For those of you who may wish to use a 3X leveraged ETF's there are two that I recommend. TZA which goes up 3X the value of the Russel 3000 and SQQQ which is tied to the NASDAQ 100.

Comments

    0 of 8192 characters used
    Post Comment

    • Mitch King profile image

      Mitch King 

      8 years ago from Wilsoville, OR, USA

      This is some excellent advice in your hub. I try hard to keep my portfolio varied and take several approaches so that if one fails I do not lose it all.

    • DiamondRN profile image

      Bob Diamond RPh 

      8 years ago from Charlotte, NC USA

      I am using FAS for big banks, BGU for large caps, TNA for small caps and ERX for energy plays.

      None of these are going to tank because of management missteps or hanky panky by a CEO, etc.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)